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Deals let drug-makers Novartis, Glaxo and Lilly corner the market in their fields

The headquarters of the British pharmaceutical company GlaxoSmithKline in west London in a 2013 file photo. The drug-maker is one of three that announced a massive assets swap Tuesday.
(BEN STANSALL / AFP/GETTY IMAGES)

Tues., April 22, 2014

Novartis AG will focus more on cancer, GlaxoSmithKline Plc on vaccines and Eli Lilly & Co. on animal health as the drug-makers announced a series of deals Tuesday for a total of as much as $28.5 billion.

The transactions, as well as a plan to form a consumer- health joint venture with Glaxo, are part of an overhaul of the pharmaceutical industry spurred by the loss of sales as best-selling medicines lose patent protection.

Pfizer Inc., the world’s biggest drug-maker, sold its infant-nutrition business to Nestle SA for $11.9 billion in 2012, and then last year spun off its animal-health unit.

Novartis agreed to buy cancer drugs for as much as $16 billion while selling most of the company’s vaccines division to Glaxo for $7.1 billion and its animal-health unit to Lilly for $5.4 billion.

It’s the biggest shakeup of Novartis since Chief Executive Officer Joe Jimenez took over in February 2010. The vaccines purchase is the largest for Glaxo since Andrew Witty became CEO in 2008. Lilly will become the second-largest animal-health company by sales.

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“We’re talking about three companies swapping assets so that each can specialize in what they’re good at and make it even more profitable,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv whose fund owns shares of all three drug-makers.

Novartis announced in December it would close its Ciba Vision plant in Mississauga in 2014, costing 300 jobs.

More transactions may follow. Merck & Co. is in talks to sell its consumer-health unit, according to people with knowledge of the matter. Germany’s Bayer AG and Paris-based Sanofi have both said they are interested in consumer health.

“You have to be No. 1, No. 2 or No. 3 in your segment,” Jimenez said in an interview with Bloomberg Television. “This was so critical we talked with virtually everyone.”

Shares of Basel, Switzerland-based Novartis, which rose as much as 3 per cent in Zurich, have lagged behind crosstown rival Roche Holding AG and Sanofi in the past four years.

The stock was up 2.2 per cent to 76.35 Swiss francs at 1:18 p.m. Glaxo, whose performance has lagged behind Novartis in the same period, advanced 5.6 per cent to 1,646 pence. It was the stock’s biggest intraday gain since 2009.

The price for the cancer drugs includes as much as $1.5 billion as a reward for meeting certain development goals. Novartis will also have the option to rights for Glaxo’s current and future cancer treatments in development.

Novartis will pay royalties and as much as $1.8 billion in payments based on the achievement of certain business goals as part of the vaccines agreement, Novartis said in a statement today.

The deal excludes flu vaccines, and Novartis will begin to seek a buyer immediately for those products. Excluding that operation from the deal with Glaxo will help Novartis get the most value for it, Jimenez said.

For Glaxo, the deals shift the company away from prescription drugs and toward consumer products and vaccines, which are less vulnerable to the patent life cycle.

The new joint venture with Novartis will be the second-largest consumer health care company by revenue, trailing only Johnson & Johnson, and it will control 29 per cent of the global vaccine market. It also signals a willingness to sell off promising drugs that other companies may be better positioned to market.

Glaxo and Novartis’s consumer-health venture will have about $10.9 billion (U.S.) in revenue, Glaxo said. The U.K. company will have majority control, with an equity interest of 63.5 per cent.

“What this transaction does for GSK is it takes one of the leading position in consumer health care and truly elevates us to a global leadership position,” Witty said on a conference call.

“It gives us a very rare, extremely rare opportunity to substantially strengthen our vaccine business. And it finds a home for our nascent oncology business.”

Glaxo said the transaction will probably be completed during the first half of 2015 subject to approvals. The company said it expects to return 4 billion pounds to shareholders after the completion of the deal and will maintain its commitment to increasing dividends.

Lilly said the Novartis animal-health business had 2013 sales of about $1.1 billion. The Indianapolis-based drugmaker said it will take on about $2 billion of debt and pay the rest with cash on hand. Lilly expects annual cost savings of about $200 million within the third year after the deal is completed.

BofA Merrill Lynch advised Lilly, while Goldman Sachs Group Inc. advised Novartis on the animal-health deal. Glaxo said Lazard and Zaoui & Co. are acting as joint financial advisers. The U.K. company has also received financial advice from Citigroup Inc. and Arkle Associates. Lazard and Citigroup are acting as joint sponsors for the transaction, Glaxo said.

Novartis began a strategic review of animal health, vaccines and consumer health last year because the units were too small. Jimenez said the company wanted to be the leader in its businesses or it would consider selling them. Novartis’s bigger operations include prescription drugs, the Sandoz generic-pharmaceuticals unit and the Alcon eye-care operation.

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